558,000 startups and small businesses. Why we should thank the recession. Mike | June 7th, 2010
One good thing to come out of this recession has been a dramatic increase in the number of new businesses started in the US and around the world. According to a Kauffman foundation study, in 2009 the number of new businesses hit the highest level in 14 years, with 558,000 start-ups every single month in the US alone. Multiply that globally and the numbers are staggering. Why? Well in short, the recession. When people are forced to choose between looking for jobs that they have little faith exist and staying busy, many will choose the latter. And with the tools now available to so many households and individuals the costs of starting a business are perhaps lower than they have ever been before. You have a computer, right? A cell phone? A table at Starbucks? That minimal infrastructure is adequate for a huge number of new businesses and allows entrepreneurs to hang out their shingle quickly and cheaply, and to compete powerfully.
Interestingly, the Kauffman study showed that several demographic groups were even busier than the others in getting their businesses off the ground. People aged 55-64 increased their start-up activity in 2009 as did African Americans, typically two groups whose entrepreneurial activity is slower than the general population. Why would that be? Is it hope or desperation that is the driver for these groups? Studies have shown that these two groups tend to experience longer periods of unemployment; it’s just harder to find a job in recessionary times if you are African American or a middle-aged American. With limited choices, people tend to take matters into their own hands – they become “necessity entrepreneurs.” They take action, and the action often takes the form of a new business, consultancy, or self-employment; at the end of the day, though, the result is the same: another business is born, another person or persons employed, more tax revenue generated, and more creativity unleashed in the form of services, products, and work.
So as the economy grows and as the employment picture improves, what will happen to all of these new businesses, these “no choice but to do this” folks? Well studies have shown that the historical failure rate for new businesses is 50% over five years, but the businesses that do survive are the engines of job growth. And there is reason to think that these businesses will match or even better that trend: start-up costs are low, talent is readily available, and operating costs, like rent, are lower than they have been in a decade. Plus, the competition is equally challenged and this makes for a strategic opening in many industries that haven’t been competitive in many years. The combination of this fertile atmosphere, along with the higher actual numbers of new businesses combined, bodes well for the contribution this new generation of businesses will make to the economy, to innovation, and to peoples lives.
These startups are also a leading indicator of overall economic health. Remember, however small they are, new businesses still need to spend money: they need to raise capital or take on debt and that has an impact in the financial sector. They need to buy furniture, computers, and make other capital expenditures. They not only need to buy office supplies and food, but they are also consumers of professional services like accounting, legal, and payroll and as they grow they need more services, more space, more transportation and more robust supply chains to sustain their growth. All of this combined has a trickle-down effect that impacts other businesses, large and small, which must rise to meet the increased demand A virtuous cycle is created, and the benefits ultimately flow in the form of orders, receivables, and jobs. The risk (as always) lies with the new entrepreneurs, whether they have taken the plunge out of “necessity,” out of desperation, or with the need and desire to create something new to the world. The benefits (as always) are meaningful to all of us, in the form of jobs, customers, and revenues for our own start-ups and small businesses.